Depressed metals make miners seem like a bargain

MichaelKahn

Bloomberg

If the trend in industrial commodities were the genie from “Aladdin,” it would serenade traders with his signature song, “You ain’t never had a friend like me.” This trend is solid to the downside, and that is bad news for both commodities and for the economy.

I was never in the “deflation” camp before, but looking at the trends in copper, palladium and other industrial commodities, not to mention stocks of companies that use them, such as steel, it is hard to think things are OK. The entire bottom of the economic food chain — sectors that supply the basics to the economy — is in rough shape.

It seems illogical that prices of companies that use these basic industrial inputs would be depressed since they theoretically should have lower costs and better profit margins. Even from my technical-analysis chair I can see that low demand from the economy means even lower demand for the raw materials and the whole thing moves lower.

It is not easy for individuals to trade industrial commodities because they live primarily in the futures markets. However, there are other ways to take advantage of the current bear market including exchange-traded notes (ETNs) and stocks of companies that extract them from the ground.

Unfortunately, most of the ETNs are rather thinly traded. Copper is one of the more active ones, but the iPath Bloomberg Copper Subindex
JJC, +0.27%
is still light at only 17,000 shares per day. A better method to play copper would be a miner such as Freeport McMoran
FCX, +3.54%

This stock has been in a bear market since 2010 and really fell apart about a year ago when many commodities, led by crude oil, imploded. Last month, technicals started to change for the better with a surge in volume to suggest change is in the air (see Chart 1). Momentum indicators read “oversold,” and price approached long-term support from the bottom of the last commodities implosion in 2008.

Monday, Fed Vice Chair Stanley Fischer said that inflation was too low and the market interpreted that as cause for the Fed to delay its plan to raise interest rates. That set the dollar lower while commodities surged.

Freeport McMoran notched a pattern called a bullish key outside-day reversal by jumping down to a new low but closing above the previous day’s high. Unfortunately, the next day, China devalued its currency and the whole move was reversed. The pattern failed.

Failure to rally given all the signs in place suggests the market is seriously weak and not ready to recover.

Another stock worth watching is miner Rio Tinto
RIO, -0.04%
Involved in aluminum, copper, minerals, energy and iron ore, earnings were hurt by the commodities slump so last Monday’s blip up seemed promising. The stock scored a short-term breakout and even closed above its 50-day moving average (see chart 2). Weekly charts also seemed to confirm bullish changes in momentum by rallying back above what was a broken support level.

Again, the next day it all fell apart and so did rebounds in related stocks such as Alcoa
AA, -1.08%
. It is hard to find any miner of copper, uranium or palladium that looks any better.

And to cast a wider net, industrial agricultural commodities such as cotton and lumber are also still in bear markets. Cotton failed intraday last Monday and remains in a floundering training range since September. And lumber is still in its two-year decline without any indication a bottom is near.

All in all, there is nothing on the charts to suggest this massive bear is nearing a bottom. It will take more than a one-day wonder rally to make the change and that means these commodities and many of the stocks that produce them are still in a world of hurt.

The only caveat so far is that many of them are far below respective trendlines and moving averages. That still leaves the door open for technical bounces and a reason not to chase these stocks right here and now. Any bounce lacking in volume, in the number of days in play higher or a definitive downward move in the U.S. dollar would set up another selling opportunity for short-term traders.

It may be a tired old saw, but the trend really is your friend. And if you are a long-only investor licking your chops at what seems to be sale prices, be patient. The risk is still to the downside.

Michael
Kahn

Michael Kahn, a chartered market technician (CMT), is a columnist for MarketWatch as well as Barrons.com, where he writes the “Getting Technical” column. He is the author of three books on charting, contributes to several trading and investing websites, and speaks at industry events.

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